Inconsistent payment practices are a common headache for general contractors (GCs) and subcontractors in the construction industry. Poor communication, cash flow disruptions, and the constant juggling of payment disputes can create a perfect storm that threatens the stability of even the most well-managed projects. In fact, a recent survey found that it takes construction companies an average of 83 days to receive payment for their work.
When cash flow slows, everything else grinds to a halt. Projects can stall, subcontractors may become hesitant to take on more work, and the pressure of meeting payroll and other expenses mounts. Even more troubling is the potential for unresolved payment disputes, which can lead to strained client relationships, damage to your reputation, and a loss of future business opportunities.
No one in the construction industry can afford to let these issues slide. That’s why a systematic approach to managing accounts receivable is not just important—it’s essential. By implementing clear, consistent payment practices and leveraging the right tools, GCs and subcontractors can protect their cash flow, minimize disputes, and keep their projects on track. This article will guide you through the best practices and methods to ensure you get paid on time, every time.
UPDATED AT: August 22, 2024
One of the biggest challenges in construction payments is the role of change orders. These are modifications to the original scope of work that can arise from design changes, unforeseen site conditions, or client requests.
While necessary, change orders often disrupt the original payment schedule, leading to delays and potential disputes. Each change order requires negotiation, documentation, and approval, all of which can push back payment timelines and create confusion.
Common issues faced by GC’s and subcontractors in this environment include delayed payments, misses payments, and disputes over what is owed. When a GC faces a payment delay from a client, that delay trickles down to every subcontractor involved in the project.
Subcontractors, who often operate on thinner margins, are particularly vulnerable to these delays, which can disrupt cash flow and their ability to continue working on the project.
Another common issue is the complex payment structures that exist for construction projects. The variety of contractor types—such as lump sum, cost-plus, and unit price—each comes with its own set of rules and expectations that impacts how and when payments are made.
For instance, a lump sum payment contract might seem straightforward, but it can become complicated if unforeseen challenges arise during the project. On the other hand, cost-plus contracts, while flexible, can lead to disputes over what expenses are considered reimbursable.
Embracing the practices below helps streamline operations, improve cash flow, and build stronger relationships with clients and subcontractors.
Setting the foundation for construction payment starts with clear payment terms. From day one, it's essential to draft a comprehensive contract that leaves no room for ambiguity. Outline every detail, from payment schedules to milestones, and make sure to define the consequences for late payments.
A well-crafted contract isn't just about getting paid on time; it's your first line of defense against potential disputes. Transparency at this stage ensures there are no surprises down the road, keeping the project—and your cash flow—on track.
When it comes to construction projects, communication is everything. Regular updates with both clients and subcontractors are vital to keeping everyone on the same page. Miscommunication can lead to delays, misunderstandings, and ultimately payment issues.
By maintaining transparency and fostering collaboration, you can prevent issues from escalating and keep the payment process as smooth as possible.
Consistency is key when it comes to invoicing. Whether you opt for line-item invoicing, flat fees, or a hybrid approach, the most important thing is to stick with your chosen method throughout the project. Consistent invoicing not only makes it easier to track payments but also helps set clear expectations for your clients.
Accuracy and timeliness in invoicing are non-negotiable. An error-free, promptly issued invoice reflects professionalism and helps ensure payments are made on time. This consistency and accuracy keep your cash flow steady and minimize the risk of payment disputes.
In the world of construction, documentation is your best friend. Every agreement, change order, and communication needs to be documented. This isn’t just about covering your bases—it's about creating a clear, organized record that can be referred to if any issues arise.
Digital tools can simplify the documentation process, making it easy to keep track of everything in one place. From cloud storage to specialized software, these tools help ensure that all your records are accurate, accessible, and secure.
Proper documentation not only safeguards your business in case of disputes but also contributes to a more efficient and organized approach to managing payments.
These strategies enhance cash flow and reduce financial risk, helping construction businesses maintain a healthy bottom line.
In the fast-paced world of construction, waiting weeks—or even months—for payments can disrupt your cash flow. By embracing digital payment solutions like ACH transfers and credit card payments, you can speed up the payment process and reduce the stress of delayed invoices. These not only ensure faster transactions but also offer security and tracking, giving you more control over your finances.
Using construction-specific invoicing and payment software is a game-changer. These tools offer automated invoicing, payment reminders, and seamless integration with project management systems. By going digital, you’ll eliminate manual errors, boost efficiency, and ensure that your payments are accurate and on time.
Why wait for payments when you can encourage them to come in early? Offering incentives for early payments, such as small discounts, is a smart way to keep cash flowing smoothly. Not only does this approach improve your financial stability, but it also strengthens relationships with clients by showing that you value their promptness.
Structuring your contracts with clear rewards for early payments—and penalties for late ones—sets the stage for smoother transactions. By laying out these terms from the beginning, you give clients a compelling reason to prioritize your invoices.
No matter how well you plan, payment disputes can still happen. Being prepared for these challenges is key to protecting your business. Legal tools like liens can be a powerful way to ensure you get paid for the work you’ve completed, but they require careful planning and timing. Knowing your rights and the legal avenues available to you can make all the difference in these situations.
Having a legal team in your corner is crucial when navigating complex payment disputes. An experienced attorney can help you anticipate potential issues, guide you through the legal process, and advise on the best strategies to secure your payments.
By staying proactive and legally prepared, you can minimize the impact of disputes and maintain a healthy cash flow.
In today’s construction industry, managing payments efficiently is more crucial than ever. Thankfully, there’s a wide range of tools and software solutions designed specifically to help general contractors (GCs) and subcontractors streamline their invoicing, payments, and communication processes.
Below are a list of popular solutions that can be used to handle invoicing and payments.
Buildertrendis a comprehensive construction CRM that offers more than just project management—it’s a tool for managing payments as well. With features like automated invoicing, online payment processing, and change order management, Buildertrend simplifies construction payments.
Procore is another construction CRM that excels in providing a unified approach to project and payment management. Procore’s financial management tools allow you to create detailed budgets, track expenses in real-time, and manage payment schedules.
Additionally, Procore’s collaboration tools enhance communication between GCs, subcontractors, and clients, which is critical for keeping payments on track.
While QuickBooks is not construction-specific, it’s a widely-used accounting software that offers strong billing capabilities suitable for the industry. QuickBooks allows you to create detailed invoices, track payments, and manage your accounts receivable with ease. QuickBooks also offers reporting tools that help you stay on top of your financial health, ensuring that you can identify and address payment issues quickly.
Built.com is a payment management platform specifically designed for the construction industry. It offers features like digital draws, automated lien waivers, and comprehensive project tracking. Built.com’s platform is designed to streamline the payment process from start to finish, ensuring that GCs and subcontractors get paid faster and with fewer disputes.
GPay is a versatile payment solution that, while not construction-specific, can be an excellent addition to your payment management toolkit. With GPay, you can accept payments from clients quickly and securely, whether it’s through credit cards, ACH, or other digital payment methods.
In the construction industry, consistent, clear, and documented payment practices are not just beneficial—they’re essential. By establishing payment terms, communicating effectively, and maintaining thorough documentation, general contractors and subcontractors can avoid many of the common pitfalls that lead to payment delays and disputes.
Ultimately, effective payment management is critical to the overall success and sustainability of construction businesses. It not only safeguards financial health but also strengthens relationships with clients and subcontractors, paving the way for continued growth and success in the industry.